Updates

Yellen Confirms Fed Is Working on Bank-Board Issues

Luetkemeyer Tries to Box In Yellen on Bank Rules

Yellen Warns Congress On National Debt

If Asked, Would Yellen Serve?

Yellen Voices Disapproval for Rules-Based Policy

Deutsche Bank and President Trump

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Yellen Confirms Fed Is Working on Bank-Board Issues

Ms. Yellen, under questioning from Rep. Bill Huizenga (R., Mich.), confirmed that the Fed is reevaluating its expectations for bank boards of directors, an issue that has also been raised by Fed governor Jerome Powell. Bankers have been complaining for years that postcrisis rules have placed too many new obligations on boards of directors. “We are focused on trying to clarify expectations for boards of directors to distinguish the important role that they have in the banking organization,” Ms. Yellen said. See below for previous coverage about how regulators have become a larger presence in the boardroom.

Luetkemeyer Tries to Box In Yellen on Bank Rules

Ms. Yellen told Rep. Blaine Luetkemeyer (R., Mo.) she would “look forward to having the input” of President Donald Trump’s nominee for the Fed vice chair of supervision, if Mr. Quarles is confirmed for that job. Mr. Leutkemeyer was trying to box her in, asking for a commitment that the Fed would not adopt significant new rules until Mr. Trump can get his nominees in place.

Ms. Yellen wouldn’t make any promises. She repeated previous statements about how the Fed has a “relatively light” regulatory agenda but is open to making rule changes that would help community banks or reevaluate the Volcker rule, which restricts certain types of bank trading.

Ryan Tracy

Financial Regulation,

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Yellen Warns Congress On National Debt

Ms. Yellen urged Congress to take into account the growth trajectory of the federal debt when making decisions about spending and taxation. She said lawmakers need to work toward achieving "sustainability of this debt path over time," warning it could weight on productivity growth and living standards of Americans.

The Congressional Budget Office estimated last month the national debt could reach 91% of gross domestic product by 2027. Lawmakers are weighing major fiscal policy changes, including tax cuts, changes to health care and infrastructure spending, that could drive deficits higher in the coming years.

JIM WATSON/AFP/Getty Images

Kate Davidson

Economy,

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If Asked, Would Yellen Serve?

Janet Yellen can't control whether or not the president chooses to reappoint her to a second term as Fed chairwoman, but it's up to her whether she'd accept. Asked that question—Would she serve another term if asked?—Ms. Yellen said: “I absolutely intend to serve out my term. I’m very focused on trying to achieve our congressionally mandated objectives, and I really haven’t had to give further thought at this point to this question.”

Even if she has decided, she knows enough not to publicly accept a job she's not yet been offered.

Joshua Zumbrun

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Yellen Voices Disapproval for Rules-Based Policy

Rep. Gwen Moore (D., Wisc.) did Ms. Yellen a favor by giving her a chance to push back on two Republican-backed policy proposals: Forcing the Fed to spell out a more specific formula for setting monetary policy, and allowing Congress to set the Fed’s budget. Ms. Yellen, not surprisingly, pushed back on both. Expect the idea of monetary policy formulas to get attention today and going forward. Mr. Trump’s first nominee for the Fed board, Randal Quarles, has expressed openness to the idea, and it is an idea that Mr. Hensarling has pushed for years.

Ryan Tracy

Monetary Policy,

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Deutsche Bank and President Trump

Some background on Ms. Waters’ line of questioning about Deutsche Bank AG: She and other lawmakers have been pressing the bank for information about loans it made to President Donald Trump over the years, as well as transactions involving Russia and Russian clients. She tried to get Ms. Yellen to provide information about those matters, but didn’t get very far. Ms. Yellen said the Fed has not been looking at transactions involving the president. “Our focus has been on the safety and soundness of the operations of Deutsche in the U.S.,” Ms. Yellen said.

Ms. Yellen said her belief is that, although it may happen with a lag, banks will gradually raise those deposit rates.

Joshua Zumbrun

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Can the Fed Purchase Student Debt?

Mr. Hensarling also asked Ms. Yellen whether the Fed was considering buying student debt or municipal debt. It's not totally clear where this question came from. For one thing, the Fed is currently debating a strategy to unload its asset portfolio rather than acquire any new and unusual assets. For another thing, most student debt is already owned by the government. There's no evidence the Fed has ever considered buying either type of debt (although under some conditions it does have the legal ability to do so) and the Fed currently owns neither municipal bonds or student loans.

Joshua Zumbrun

Monetary Policy

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Hensarling Quotes Marvin Goodfriend

Mr. Hensarling quoted Carnegie Mellon University professor Marvin Goodfriend in his questioning. Mr. Goodfriend’s views aren’t simply part of the academic debate anymore, now that the Trump administration is considering appointing him to the Fed board.

Yellen Says the Fed Isn't Considering Raising the Inflation Target

In recent weeks, several Fed officials have openly talked about whether the Fed should reconsider its target for a 2% inflation rate. For his first question, Congressman Jeb Hensarling pressed Ms. Yellen on whether the Fed is actively considering raising the target.

"It is not," Ms. Yellen replied.

So it looks like fans of higher inflation will have to wait for another year before there's a fulsome discussion of higher inflation.

Joshua Zumbrun

Monetary Policy,

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Reading Her Testimony

When former FBI Director James Comey testified before Congress last month he submitted written remarks. Then, when the hearing actually started he began: "I’ve submitted my statement for the record and I’m not going to repeat it here this morning. I thought I would just offer some very brief introductory remarks and then I would welcome your questions."

This is not a strategy that the Federal Reserve and the House Financial Services Committee have embraced. Rather, Ms. Yellen begins with a complete and verbatim reading of the previously released written statement.

Joshua Zumbrun

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A Coordinated Republican Attack?

Rep. Andy Barr (R., Kent.) followed Mr. Hensarling in hammering on interest on excess reserves, saying it is “discouraging lending into the real economy.” Could Republicans be making a coordinated attack on this issue? Recall that Mr. Hensarling’s committee usually suggests questions for its members to ask witnesses.

Mr. Barr also hit on another long-held Republican concern about the Fed: its unpredictability. He said that while it is good that the Fed is preparing to wind down its balance sheet, he is concerned that central bankers are improvising as they do so.

Ryan Tracy

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Dow Hits a New Intraday Record

Ms. Yellen's prepared comments, widely interpreted by analysts as being dovish, pushed the Dow Jones Industrial Average to a new intraday high after the opening bell. The Dow industrials rose 151 points, or 0.7%, to 21560, above its previous closing high of 21528 hit June 19.

U.S. government bonds also rallied. In recent trading, the yield on the benchmark 10-year Treasury note was 2.309%, according to Tradeweb, compared with 2.344% before Ms. Yellen’s testimony was released and 2.362% Tuesday. Yields fall when bond prices rise.

—WSJ Staff

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Rep. Maxine Waters Reiterates Opposition to Fed Overhaul

Maxine Waters, the Democrat from California who is the committee's ranking member, used her introductory remarks to speak out against some legislative changes that Republicans have proposed for the Fed.

Specifically, Ms. Waters spoke in opposition to Republican proposals that would force the Fed to closely follow a policy rule (a mathematical formula that determines where interest rates should be), and said she opposed measures that would send the Fed through the appropriations process (currently, the Fed is self-funding).

Rep. Jeb Hensarling Offers Rare Praise for Fed

Committee Chairman Jeb Hensarling (R., Texas) kicked off the hearing with his usual focus on boosting House Republicans’ agenda, referencing how help for the economy would be coming, in his view, in the form of health-care legislation and other bills passed by the House.

He had some rare praise for the Fed, saying its moves towards a more normal monetary policy and balance sheet were positive. He also hit on the potentially politically controversial issue of the Fed paying interest on excess reserves that banks park with it. That interest should not become a normal part of monetary policy, he warned.

Ryan Tracy

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Monetary Policy,

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Testimony Starting Soon

Ms. Yellen will come to the microphone at 10 a.m. A reminder of what usually happens here: The chairman of the committee and the ranking member for the Democrats typically both read prepared statements. Sometimes a subcommittee chair will also speak. Then Ms. Yellen will read aloud the testimony that we've already dissected here on the blog. Only then will questions begin. So although the hearing starts soon, we're probably still 20 or 30 minutes away from anything new.

What Worries Markets

What Will Yellen Say About Randal Quarles?

Randal Quarles in New York in 2008.PHOTO: BLOOMBERG NEWS

Another topic that lawmakers could bring up today is the Trump administration's first nominee to the Fed’s governing board. Randal Quarles, an investment-fund manager and former Treasury official, is on tap to be vice chair of supervision. That pick was formally announced on Monday. It will be interesting to see how Ms. Yellen fields questions about Mr. Quarles, whose past views on both monetary and regulatory policy differ from hers. As long as Ms. Yellen chairs the Fed board, policy changes will need her approval. Here is a primer on what Mr. Quarles has said about Fed policies over his career:

Yellen Can Expect Lots of Regulatory Questions

Today’s hearing will be the first time Ms. Yellen has testified since a major development in the financial regulatory debate, which has been swirling since President Donald Trump was elected and promised to “do a number” on the 2010 Dodd-Frank financial overhaul law.

The Trump administration’s Treasury Department published a report in June with dozens of recommendations for re-examining or rolling back rules on the banking industry. That is squarely within the Fed's purview, and she could get a lot of questions about the recommendations.